7/11/2025

speaker
Operator
Conference Operator

Welcome to the ARJO Q2 presentation for 2025. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now I will hand the conference over to Interim President and CEO Niklas Choseverd and Interim CFO Christopher Carlson. Please go ahead.

speaker
Niklas Choseverd
Interim President and CEO

Thank you and good morning to everyone and welcome to ARJO's Q2 2025 earnings call. With me here today, I have, as you heard, Kristoffer Karlsson, our Interim CFO. We will give you some details on the Quarter 2 report that we released an hour ago. And the agenda looks as usual, includes a summary of activities and results from Quarter 2, the balance sheet items and the outlook for 2025, before we open up for questions. We intend, as always, to keep this call to an hour and finish no later than 9 CET. Next slide, please. We closed the quarter in a solid way and could see how demand continued in the quarter with organic net sales growth in line with our targeted range. We had continued strong momentum for our service and rental business and now also supported by growth in our capital sales. Our North America business is the growth engine in the quarter too, while global sales is held back due to difficult comparisons. And we closed the quarter with 3.0% organic net sales growth. And in addition, as a positive sign for the second half of 2025, this net sales development is supported by a significant stronger order intake growth. In our largest market US, we continue to see a positive development, and this is related to a combination of our internal efforts to create a more focused US sales organization, as well as the financial situation and staff shortages improving among our customers. In global sales, we had difficult comparisons with last year, with a strong quarter two last year. We still see several countries in Europe with improving demand. For example, France, Germany and Italy had good growth. But UK couldn't match last year's sales levels. Our gross margin came in at 43.4%, almost at par with last year's 43.6%. We continue to get support from lower material cost and price adjustments, while these improvements are offset by currency and tariff headwinds. For the rest of 2025, we will continue to drive efficiency focus throughout the value chain, based on the plans that we have put in place, for example within supply chain. Our focus on price adjustments will obviously also remain to secure compensation for salary inflation and US tariffs. On the OPEC side, we have been able to slow down the cost increase versus quarter one, and our efforts to increase cost efficiency are now showing effect. Adjusted EBITDA for the quarter was 475 million SEK versus 496 million SEK in quarter two last year. A reduction coming from currency and US tariff headwinds. Neutralized for currency and US tariff headwinds, the adjusted EBITDA would have increased, showing a stable underlying business. Our operational cash flow came in at 205 million, leading to a cash conversion of 47% for the quarter. For those knowing our business, you know that the first half of the year is from a seasonality perspective weaker in cash flow and cash conversion, and it will improve during the second half of the year. In summary, we are delivering a stable second quarter of 2025. Our underlying business develops in a solid way and we can see how our business model with capital, rental and service is helping us to deliver stability in growth and underlying earnings trend. In addition to this, we see several important markets showing good signs of increased activity level and healthy demand for our products and solutions. We now have three quarters in a row with higher order intake than sales growth. And we are having a strong order book for the quarters to come, making me believe in a stronger second half of 2025. Next slide, please. Our North America business grew double digit organically in the quarter, with US as the main growth engine. In our largest market, US, we have a continued strong and positive development also in this quarter. The double-digit growth in US in the quarter was seen across our product categories. Rental and service continues to drive growth and is developing well. On the capital side, demand is becoming stronger for every quarter and it's mainly driven by our important patient handling product category. where we also see very positive reception for our newly launched Maximum 5 patient floor lift. We had a continued strong development in Canada, where it's especially our long-term care business that is driving the growth, also with good profitability levels. Canada is now having more than 20 consecutive quarters of growth. Then over to Western Europe and the rest of the world that make up our global sales region. In Q2, this region declined net sales with minus 1.8% due to difficult comparisons from last year Q2, combined with a weaker than expected market in UK. In Western Europe, the comparison to last year is tough and we declined minus 2.4% versus last year Q2. In addition to the difficult comparison, UK is weaker than expected. It is related to delay in some larger orders and we will need to focus on a catch up in the second half. Countries with good demand and strong organic net sales growth in the quarter was France, Germany, Italy and Spain. Our service and rental business in Western Europe continue to develop well in the quarter. Overall, we see good signs for the second half of the year in this region due to strong order intake and a healthy order book. Our business in rest of the world had an organic net sales growth of plus 0.5% in the quarter with a mixed picture across the markets. India, Singapore, United Arab Emirates all grew double digit in the quarter where India stands out with an impressive 40% growth. We see good signs for the second half of the year in this reading as well, due to strong order intake and a healthy order book. Next slide, please. Our gross margin came in at 43.4%, almost at par with last year's 43.6%. We continue to get support from lower material costs and price adjustments, while these improvements are offset by currency and US tariff headwinds. Neutralizing for currency and US tariff headwinds impact, our underlying margin is improving versus last year. We are, as before, working hard to mitigate the headwinds with continued long-term efficiency gains throughout the value chain, including solid focus on continued supply chain efficiencies. We will also continue to work on price adjustments as one part of the puzzle to mitigate US tariffs and other external cost increases. Next slide, please. Adjusted EBIT in Q2 declined versus last year, only due to currency and US tariff headwinds. Neutralized through currency and US tariff impact, EBIT would have been improving, showing a stable and improving underlying business. On the OPEC side, we have been able to slow down the cost increase versus Q1, and our actions to mitigate the cost increase in Q1 is showing effect. And I am happy to see the response from the organization after Q1, with now much sharper focus on cost improvements in quarter two. And I believe we have set the tone for the rest of the year to manage OPEX in a good way. We had a negative effect from the evaluation of AR and AP of two million in the quarter, booked under other expenses. This was minus five million in the same quarter last year. Adjusted EBITDA for the quarter was, as I said, 475 million SEK versus the 496 million SEK in quarter two last year. A reduction coming from currency and US tariff headwinds. As I said, neutralized for currency and US tariff headwinds, the adjusted EBITDA would have increased. Also here showing the stable underlying business. Restructuring cost came in at minus 34 million in the quarter. It's related to our change of go-to-market approach in China, as well as ongoing improvements in our global sales structure to improve the cost situation for the future. Next slide, please. And here I hand over to our Interim CFO, Christoffer Karlsson.

speaker
Kristoffer Karlsson
Interim CFO

Thank you, Niklas. Operating cash flow improved slightly compared to Q1 2025, that was 140 million SEK lower year over year, primarily due to build up in working capital and lower EBIT. The increase in inventory reflects strong order book performance, upcoming rental investments and newly launched products. These new products temporarily raise inventory levels before older ones are phased out. Additionally, we had a temporary cash flow impact of 50 million SEK due to a VET settlement, which we expect to recover in Q3. Excluding this, receivable collection would be in line with last year. As a result of the working capital build up, working capital days increased to 83, up from 81 in Q1 2025. Combined with the low profitability, this led to an operating cash flow of 205 million SEK, down from 344 million SEK in Q2 2024. Consequently, cash conversion was 46.7% compared to 69.7% last year. Adjusted for the VET settlement, cash conversion would have been about 59%. That said, cash flow typically strengthens in the second half of the year and we remain on track to reach our full year target of 80%. For reference, cash flow from investing activities was 171 million SEK compared to 112 last year. increase is mainly due to 22 million higher investment in rental fleet as well a new office in france and a distribution center in sydney australia next slide please the increase in net debt this quarter is mainly due to lower operating cash flow and higher rental investment and the 259 million sec dividend payout to shareholders our financial net improved to 48 million SEC, 17 million SEC improvements versus Q2 2024. And it's driven by lower interest rates. Despite the seasonal impact, our cash position remains strong. Net debt to adjust the EBITDA was 2.3, slightly down from 2.4 in Q2 2024. Excluding the VAT assessment, it would have been 2.2, which is then within the normal seasonal variation. Our equity ratio stood at 48.7%, down from 51.2% in Q1 2025, mainly due to the dividend and some FX effects. With that, I hand it back to you, Niklas. Next slide, please.

speaker
Niklas Choseverd
Interim President and CEO

And thank you, Kristoffer. Our outlook for 2025 is that the organic net sales growth will be well within the group's target interval of 3% to 5%. Next slide, please. With that, I would like to summarize today's telco. We have continued healthy demand for our products and solutions, with net sales growth in line with target, higher order intake growth, and further strengthened order book. The US market and our important patient handling category are both standing out positively in Q2, which is very much in line with our long-term agenda. We see clearly that our cost efficiency measures are paying off and our focus in this area will continue moving forward, of course. Overall, a positive quarter for us, and despite the current macro environment and related uncertainty, our strength and order book makes us confident that we will be able to deliver a strong second half of the year. With that, we can open up for questions. So moderator, please go ahead.

speaker
Operator
Conference Operator

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Christopher Lillieburg from DNB Carnegie. Please go ahead.

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

Thank you. Three questions. First, good to see the lower cost here in the quarter. So I wonder about the possibility to lower them further for the remainder year and whether it's maybe even possible now to keep operating costs flat as a chance of sales for the full year. Second question is if you could maybe quantify more in any way the strong order growth you talk about and the backlog. And finally, third question. I wonder about the reason here for the weaker UK sales and your visibility for that improving in the second half of the year. Thank you.

speaker
Niklas Choseverd
Interim President and CEO

Thank you, Christopher. On the operating expenses, we will for sure continue our effort. I think we have started a very good process within the company now. So of course, the focus continues. To say exactly sort of increase year over year is probably difficult. I think the organic OPEX increase year over year in quarter two at 2.1 is slightly better than I expected. So just as a reference point. And then of course, we have an ambition to be at least flat on OPEX to sales for the full year. So we will continue to fight for that for sure. On the order book, we don't report order growth, as you know, but I use the word significantly stronger. So I hope you can see that it is something we would like to highlight for you. So that's why we push it here in the communications. UK sales came in weaker than we expected as well. We do have good explanation in terms of some larger orders that was pushed into quarter three. Maybe due to our impression is that it's a little bit longer lead times decision processes with NHS. You probably know that they go through a quite big reorg right now, so it could be connected to that. But the orders are there. It's more decision point and be able to deliver on them.

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

The large orders that were pushed into third quarter, if they had been delivered in the second quarter as expected, what would have been the impact on overall Western Europe sales growth? Would that be positive then?

speaker
Niklas Choseverd
Interim President and CEO

No, Matt, I cannot say that. But just one more comment. What I want to try to say is that those two are important, the bigger orders, and that would help the situation, absolutely. But we also see a little bit slower rental in UK in the quarter. So there are two things I would say explaining this. And on the bigger orders, I see catch up second half. Rental, we need to analyze a little bit more.

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

Great, thank you.

speaker
Operator
Conference Operator

The next question comes from Sten Gustafson from ABG Sundal Collier. Please go ahead.

speaker
Sten Gustafson
Analyst, ABG Sundal Collier

Yes, thank you. Good morning. First on the tariffs, what do you hear? What's the latest there? Maybe on Canada and Dominican Republic specifically, are you paying any tariffs on shipments to the US from those two countries or are they exempt from tariffs? That would be my first question. And then maybe on the gross margin here, based on the backlog you have now, which sounds promising. How do you see the gross margin develop based on the backlog for the second half? That would be my second question.

speaker
Niklas Choseverd
Interim President and CEO

Yeah. Okay. Thank you, Stan. On the tariffs, your specific questions there, we can say that for Canada, it's still exempted since we don't pay tariffs from Canada factory in the US. But lately today in the news media, we see things happening all the time. But for quarter two, no tariffs and no decisions on tariffs going on either for Canada. But let's see what happens. Dominican Republic, we do pay 10% of the base tariff in quarter two. And we still have hopes that maybe the free trade zone we are in could be exempt, but that's not anything we have indication of today. For the GP, yeah, we are happy with the order book, both the volume and that it's patient handling driven. So I think I will stop there actually, Sten, because I cannot guide exactly on the GP development for the second half, as you know. But we are happy with the order book.

speaker
Sten Gustafson
Analyst, ABG Sundal Collier

Okay, thank you.

speaker
Operator
Conference Operator

The next question comes from Mattias Vadsten from SEB. Please go ahead.

speaker
Mattias Vadsten
Analyst, SEB

Good morning. Thanks for taking my question. The first one is just coming back to the order book. My line broke a little bit there. If you provided any order growth figure for Q2, and also maybe if you could elaborate a little bit on how much bigger the order book is now versus a year ago. And maybe also if you could share some thoughts on the anticipated organic growth for Q3. That would be helpful as well. That's the first one, then I will come back.

speaker
Niklas Choseverd
Interim President and CEO

Okay, but your line didn't broke up. I didn't give any indication on the size of the order book. I only said that I used the word significantly bigger than last year same time and significantly higher order intake growth and sales growth. And I hope you can use that as a reference. are happy with the order intake route. Organic group for quarter three you know that I will not give you a number on that but you know that it was a weak quarter last year and as I said we have built our order book for three quarters so part of that should be delivered in quarter three so we are comfortable with quarter three group.

speaker
Mattias Vadsten
Analyst, SEB

Good and then when it comes to the gross margin if you could just elaborate on What kind of mix do you anticipate, geographical and byproduct, when it comes to the second half of this year?

speaker
Niklas Choseverd
Interim President and CEO

When it comes to the geomix, we will see that North America continues on the track that you see first half. So it's very positive. But what we also are very happy to see is that in the order book, we also are seeing very good increase from global sales. So even if global sales was declining slightly, net sales growth in quarter two, second half looks better. And that is very promising. From a product category perspective, it is patient handling that is driving us for sure, but also other categories are growing. We will not guide on the mixed effects here now, but it looks good.

speaker
Mattias Vadsten
Analyst, SEB

Thanks. Then lastly, when it comes to non-recurring items, they are quite high here also in Q2. So what is the general outlook for those non-recurring items?

speaker
Niklas Choseverd
Interim President and CEO

expected head and you know any larger restructuring to be made or anything that we should know that's the last one thank you now i understand that it's the first half for this year we have unusually high restructuring and it's from quarter one you know it was the management changes and now in quarter two it's more about operational changes to drive future lower cost structures so it's a positive from that perspective and will help us in the future i i don't see now that we would have the same level of restructuring second half i cannot see that but of course if we see opportunities to do structural improvements we will take them of course to shape the company good for the future But it's difficult to say that it would be the same level as first right now. Thank you so much.

speaker
Operator
Conference Operator

The next question comes from Ludwig Germunder from Handelsbanken. Please go ahead.

speaker
Ludwig Germunder
Analyst, Handelsbanken

Good morning. Ludwig Germunder from Handelsbanken. Two questions, please. Firstly, with regards to the strength in North America, would you be willing to quantify the magnitude of growth in the U.S. and whether it included any one-time benefits? And my second question would be with regards to the cash conversion in the quarter. How comfortable are you for the full year, and can you expand on the nature of this temporary VAT receivable in the Netherlands? Thank you.

speaker
Niklas Choseverd
Interim President and CEO

Yeah, for sure. Thank you, Ludvig. So yeah, we can talk about U.S. growth in the quarter. So the net sales growth in U.S. organically was slightly higher than 12%. So we are very happy to see that. And there were no one-time effects there. And it's really a very good underlying business growth, giving that number. And when it comes to the second question, I hand it over to Christopher.

speaker
Kristoffer Karlsson
Interim CFO

Yes, regarding the settlement in Netherlands, it is something that we have investigated on our own. It's nothing that comes from the authorities. So we have done our own correction of historical periods and we are estimated to get this money back in Q3 now. And then the question on the cash promotions. We have a lower level year to date than we had a year ago, but we're still aiming for 80%. It's a little bit more stretch, of course, given where we start now after the second half, but we do see quite strong working capital improvements in the second half as well. So we're still aiming for 80%.

speaker
Ludwig Germunder
Analyst, Handelsbanken

Okay, perfect. Thanks so much.

speaker
Operator
Conference Operator

The next question comes from Ludvig Lundgren from Nordia. Please go ahead.

speaker
Ludvig Lundgren
Analyst, Nordea

Yes, hi, Niklas and Christopher. So two questions for me, please. First, you highlight a 10 million tariff effect from the new U.S. tariffs here in Q2, and I wonder if you can estimate whether this level is fair to extrapolate? Because I assume there's some inventory effect maybe holding this down here in Q2.

speaker
Kristoffer Karlsson
Interim CFO

Yes, we believe it could be slightly higher given that we have higher volumes in the second half. And we also have an impact on our inventory and very small impact on the rental assets as well due to this tariff because we only account them and record them in the P&L when we actually have sold the goods of course. So you have a tariff component in the inventory value as well.

speaker
Ludvig Lundgren
Analyst, Nordea

Okay, great. And then secondly, I wonder if you can specify what type of costs are included in exceptional items. Thinking mainly here about the 24 million you categorize under COGS, because I think that differs a bit from how you categorize the NRIC in Q1.

speaker
Kristoffer Karlsson
Interim CFO

Yes, that is related to our change, go-to-market model in China, where we actually have taken some costs related to old inventory and scrutinized some of the products that we have in the inventory.

speaker
Ludvig Lundgren
Analyst, Nordea

Okay. And could you specify anything about, like, should we expect continued work here in H2 as well, or is this done now, so to say?

speaker
Kristoffer Karlsson
Interim CFO

Not for China. That's complete now.

speaker
Ludvig Lundgren
Analyst, Nordea

Okay, great. Yeah, thank you very much.

speaker
Operator
Conference Operator

Thank you. Next question comes from Christopher Liljeberg from DNB Carnegie. Please go ahead.

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

Yeah, hi. One follow-up question on the tariffs and what do you think are the possibilities to compensate this with price increases in the U.S.? ?

speaker
Niklas Choseverd
Interim President and CEO

Yeah, I mean we started already beginning April to drive price increases in US and we have been successful in some pockets but that work needs to continue and it's of course it's a work to be done in a commercial balance of course we don't want to lose orders to competitors due to price increases so we do it where we have a really pricing power we do it on on the situations where we anyway can rewrite contracts etc so we are a little bit sensitive but we so far we have been quite successful and we will continue second half as well for sure but i see a good opportunity over time to fully compensate

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

But was the 10 million, was that the net negative effect, including some price increases also?

speaker
Niklas Choseverd
Interim President and CEO

No, that is the cost impact.

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

So what do you think the net effect was in the quarter?

speaker
Kristoffer Karlsson
Interim CFO

Our price increases is just taking effect towards the end of the quarter. So it's not that much in Q2. We foresee a better impact from Q3 on what's given. Price increases take some time.

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

We should expect a lower net effect then for the second half of the year.

speaker
Niklas Choseverd
Interim President and CEO

That is our ambition. As Christopher said, there will be higher volumes going into U.S. second half. So the actual tariff amount will increase. But of course, our price increases should follow the volume as well. So we have good hopes to mitigate as much as possible.

speaker
Christopher Lillieburg
Analyst, DNB Carnegie

Okay. Thank you.

speaker
Operator
Conference Operator

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

speaker
Niklas Choseverd
Interim President and CEO

Okay, thank you for that. And thanks for all the good questions. We will sum it up here quickly. So we are seeing a stable quarter two. And as we said, we have an order book that tells us that the second half will be stronger from a net sales growth perspective. So we look forward to the second half of 2025. So thank you for listening. Have a good day.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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